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Tuesday, September 25, 2007

A Reality Check on Oils Sands Costs and the Impact on Albertans.

Let’s get something straight about oil sand project costs. The oil sand project developers total project costs are paid by the citizens of Alberta in forgone royalties. This is under the current regime and would continue under the recommendations of Royalty Review Report. Only 1% of gross revenues are due as a royalty until all project construction, financing and operational costs during a project build and prior to plant production.

Sure government get taxes on the industry activity from personal income taxes on citizens who earn a living from working on are with the various projects. They get corporate taxes on net profits again – after all expenses are paid.

With that deal from Albertans why would project developer’s care about cost over runs? They end up being paid 100% by deferred royalties by Albertans in any event. Even after project costs are recovered and the royalty kicks in, the current 25% and the proposed 33% royalty of oil sands is only on NET PROFITS. Again all developer operating and related costs of a plant are deducted before royalties are calculated and charged. If a project has a net profit of 10% ( a modest assumption) that is the amount the royalty is calculated against - nothing more.

Besides project costs are management decisions in the hands of the corporations. If they are too high then management of the corporations needs to control them or make alternative arrangements. Like howabout spreading out the projects so they do not all chase the same workforce and suppliers at the same time and drive up prices for labour and materials.

When an oil sands project has a doubling of costs (and that seems to be the norm) they don’t even have to go back to further approvals from the EUB to have the impacts reviewed again. Those increased costs change the essence of the approvals and are not neutral on the rest of the Alberta economy nor the economy in the rest of the Canada. The project managers don’t have to consider the increased cost and accelerated project approvals might have on cumulative impact on housing prices, inflation, wage escalation and competition with other sectors or if municipalities can afford to compete for steel and concrete for public infrastructure.

At at high oil prices they can absorb the cost increases handily so they don’t seem to worry about the implications to other on such decisions. They get to unilaterally turn the entire province into what Fort McMurray has become...thank to the benign neglect of the Klein regime to the regional needs. IN fairness it was the oil sand companies working in conjunction with the municipality that did the calculation and delivered the needs assessment to the Klein government - only to be ignored at the political level. I know because I was on the team with industry and the regional government that wrote and presented the Wood Buffalo Business Case to the Alberta government in 2005.

To say high costs for project is a barrier and royalties are to be kept as they are is rich given who makes the decisions and that the rest of us end up paying the pipers. If that is not infuriating enough, I understand the oil companies have had record sustained profits in the recent past. Here is the kick in the head. Apparently senior people in some companies have had seven figure annual bonuses AND those costs are seen as project costs as well so the rest of us get to pay for them too.

Please you scions of the Alberta energy industry - say and prove this bonus bulls##t ain’t so. Inquiring minds want to know.